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Palantir Technologies (PLTR) stock has been trading in the mid-$20s since posting its Q4 earnings on Feb. 5. Its put option premiums are high and yield up to 2.2% for 3 weeks expiration. This is ideal for existing shareholders who want to hold PLTR stock and gain extra income.
I discussed this trade in several recent Barchart articles and the trades have worked out well. My March 1 article, “Shorting Palantir's Out-of-the-Money Puts Makes Sense Here for a 2.26% Yield in 3 Weeks,” discussed shorting the $23.50 strike price put for expiration on March 22. (My previous Feb. 11 article on PLTR also had a successful short-put play.)
At the time it was out-of-the-money (OTM) by over 5.8% since PLTR stock was at $24.96 (i.e., $23.50/$24.96-1). The premium received was 67 cents, so the put yield was 2.85% (i.e., $0.67/$23.50). Since PLTR closed at $24.18 on March 22, the put option expired worthless, so the short put investor had no obligation to buy the stock.
Today, PLTR is at $24.66 and it makes sense to roll this trade over again. But first, let's review why this trade makes sense. I discussed this in a recent GuruFocus article, but below is a summary of why I think the stock looks cheap.
PLTR Stock Valuation
Palantir produced $731 million in adjusted free cash flow (FCF) on $2.23 billion in revenue in 2023. That works out to a very high 33% FCF margin. Moreover, this buttresses a much higher valuation for PLTR stock.
For example, analysts surveyed by Refinitiv and shown by Yahoo! Finance on its analysis page show that revenue could rise to $2.71 billion this year and $3.23 billion next year. That implies that sometime in the next 12 months (NTM) the company will be on a run rate revenue of $2.97 billion.
So, if we apply a 33% FCF margin to this run rate revenue, adj. FCF could rise to about $1 billion. That will allow us to forecast a stock price. For example, using a 1.333% FCF yield implies that its market cap could be $75 billion sometime in the NTM. This is seen by dividing $1 billion by 0.01333.
Another way to look at this is as follows. If Palantir were to pay out 100% of its FCF as a dividend, it's likely the stock would have a 1.333% dividend yield or even lower. For example, with a 1.0% dividend yield, its market cap would rise to $100 billion (i.e., $1b/0.01).
As a result, since its market cap today is about $55 billion, PLTR stock could be worth $20 billion more or 36% higher at $33.53 per share (i.e., $24.667 x 1.36).
Shorting OTM Puts for Income
Today, the April 12 expiration put option chain (less than 3 weeks away) shows that the $24.00 strike price puts trade for 65 cents per contract. That implies that the short put investor can make an immediate yield of 2.708% (i.e., $0.65/$24.00).
However, that strike price is less than 3% out-of-the-money. A lower strike price has a slightly lower yield, but slightly less risk. For example, the $23.50 strike price put trades for 47 cents. That strike is 4.7% OTM but the yield is 2.0% (i.e., $0.47/$23.50).
Moreover, a less risky trade would be to short the $23.00 strike price put for expiration on April 12. It is 6.73% below today's price but the premium is still high at 33 cents. In other words, the short-put play yields 1.43%.
The bottom line is that PLTR is likely to keep treading water here and possibly rise. As a result, it makes sense for existing shareholders to create pseudo income while holding the stock by shorting OTM puts.
After all, PLTR still does not pay a dividend and this is one way to get paid while waiting for PLTR stock to rise.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
